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A well-diversified investment portfolio allows an investor to lightly dance around any disturbances in the marketplace. Materials exchange traded funds (ETFs) as a way to meet your investment diversification needs?

When looking at any sector or group of ETFs, it’s important to mind several things:

Liquidity. When you’re placing smaller orders as an individual investor, it’s important to take into account asset size and trading volume to ensure you can trade when you need to, and at a good price.

Expenses. What’s the cost of the funds? XLB is 0.22%; IYM is 0.47%; VAW is 0.25%; and MXI is 0.48%.

Holdings. Potential investors should also look into a fund’s holdings. XLB is the most concentrated and least diversified, IYM and VAM are successively less concentrated and more diversified, and MXI is the least concentrated. XLB holds materials companies within the S&P 500, IYM and VAW have expanded out of the S&P. MXI is the only one that has non-U.S. holdings. [How to find ETF holdings.]

Yield. If you worry about total returns from dividend yields, it is a good idea to compare yields – yield is distributions divided by current ETF price. Lower expense ratios also result in higher fund dividends and higher total returns. All four mentioned funds have decent yields, but MXI is currently trailing the group. The yield trend shows that the four funds paid a significantly lower dividend in 2009 than in 2008. A recovering world economy will eventually translate into improved dividend yields.

Which one is best? That’s up to you. Is cost a major concern? Or is it diversity within the holdings? Perhaps you want a non-U.S. allocation. By looking at the above criteria for these or other ETFs, you can help narrow down your list of potentials to reveal one clear winner.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.